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Supreme Court of India

Rigorous scrutiny of process of distributing natural resources: “Coalgate” judgment advances Supreme Court jurisprudence

GautamBhatia_SupremeCourtofIndiajpgIn a landmark judgment last week, the Supreme Court held that the central government’s allocation of coal blocks to public and private companies during the seventeen years between 1993 and 2010 was illegal and ultra vires the Constitution. The coal block allocation scam, popularly known as “Coalgate”, came to the forefront of the political and legal landscape when a 2012 report by the Comptroller and Auditor General (“CAG”) accused the government of causing huge losses (Rs. 1.86 lakh crore) to the public exchequer in its coal allocations. The same year, M.L. Sharma and Common Cause separately filed petitions before the Supreme Court, challenging the allocation. The petitions were clubbed together and heard jointly by the Court, which delivered its judgment last Tuesday. The political and economic ramifications of Manohar Lal Sharma v. The Principal Secretary (“Coalgate”) are already being felt. The judgment is also of great interest because of its significant contribution to one of the most important constitutional issues in contemporary India: the judicial review of the government’s distribution of natural resources.

The Spectrum Cases – the Supreme Court’s scrutiny of process and policy

In a previous post here, I had discussed the Supreme Court’s opinions in the “2G Spectrum Cases”. In the First Spectrum Case, the Court invoked the principle of equality under Article 14, the common law doctrine of “public trust” (that is, the government acts as a trustee of the people in its ownership and distribution of natural resources), and the requirement of managing natural resources in order to serve the common good (drawn from the Directive Principles of State Policy) to hold that a public auction was the only acceptable way of distributing natural resources to private parties for exploitation. In other words, the Court not only scrutinised – and invalidated – the process by which distribution took place, but also the policy. The Court’s judgment (I argued) conflated two separate issues: the government’s obligations under the Directive Principles and the public trust doctrine, and the Court’s power (or lack thereof) to enforce those obligations. In deciding not only upon the process, but also the policy of allocation, the Court overstepped its authority in entering a field that was both beyond its competence and its legitimacy.

After the First Spectrum Case, the Court embarked upon a process of self-correction. In the Second Spectrum Case (a Presidential reference), the Court limited the holding of the First Spectrum Case only to spectrum allocation, and held that it did not lay down a requirement for public auctions being the only legitimate methods of distribution in all cases. The Second Spectrum Case left open the question, however, of the extent to which the Supreme Court could substitute its own opinions about legitimate policy for that of the government, and various observations in that case point in different directions. In Coalgate, the Supreme Court has gone a long way towards answering that question.

Before the Court, the petitioners contended that the coal block allocation violated statutory requirements under the Mines and Minerals (Regulation and Development) Act, 1957 and the Coal Mines (Conservation and Development) Act, 1974 as well as the public trust doctrine, and Article 14. In paragraphs 12 through 73, the Court examined the statutory question (see an analysis here), and found that the allocation was illegal. Ordinarily, this would preclude any need to examine the constitutional question. However, perhaps in view of the government’s history of amending laws retrospectively to get around court decisions, the Court then proceeded to consider the constitutional questions as well.

The Supreme Court’s refusal to second-guess government policy

SupremeCourt_CoalgateThe process of allocation was done by a Screening Committee constituted by the Ministry of Coal. In paragraph 82 of its judgment, the Court framed the three constitutional issues that arise for its consideration: first, whether the allocation of coal blocks ought to have been done via public auction; secondly, whether the allocations based on the Screening Committee’s recommendations were unconstitutional; and thirdly, whether the allocations made via government “dispensation” (through the Ministry of Coal) were unconstitutional. The Court settled the third question on the basis of statutory violations (paragraph 153). Therefore, we shall focus here on the first two questions. Notice that while the first question pertains to the policy of allocation (public auction versus all other methods), the second question is about the process of allocation.

The Court correctly noted that the first question required it to consider the two spectrum cases discussed above. Affirming the Constitution Bench’s opinion in the Second Spectrum Case, it noted the Central Government’s contention that the increase in input price (due to a public auction) would have a “cascading effect” upon the economy (paragraph 100), the detailed objections of the state governments (such as, for example, that auctions would lead to the concentration of industries) (paragraph 100), and the supply-demand mismatch in 1993 (paragraph 102). On the basis of these considerations, the Court held:

WorkSafeAntiSexualHarassment“[We] cannot conduct a comparative study of various methods of distribution of natural resources and cannot mandate one method to be followed in all facts and circumstances, then if the grave situation of shortage of power prevailing at that time necessitated private participation and the Government felt that it would have been impractical and unrealistic to allocate coal blocks through auction and later on in 2004 or so there was serious opposition by many State Governments to bidding system, and the Government did not pursue competitive bidding/public auction route, then in our view, the administrative decision of the Government not to pursue competitive bidding cannot be said to be so arbitrary or unreasonable warranting judicial interference. It is not the domain of the Court to evaluate the advantages of competitive bidding vis-à-vis other methods of distribution / disposal of natural resources.”

This is consistent with the opinion in the Presidential Reference Case, namely that an auction is required only when the aim of an allocation is to maximise revenue (because clearly, under Article 14, an auction is the only method that bears a rational nexus with an objective of revenue maximisation), but that it is open to the government to have objective other than revenue maximisation, which are also consistent with the public trust doctrine and Article 39. In this case, the Court examined the material on record, which clearly indicated that the government’s objectives went beyond direct revenue maximisation, and refused to substitute its own opinion of which policy would be most consistent with public trust and the Directive Principles. This is exactly how it should be.

Absence of relevant guidelines: Constitutional infirmity in the procedural lapses

The Court then examined the process of allocation, via the Screening Committee. In Paragraphs 109 through 151, it examined the minutes of the 36 meetings of the Screening Committee between 1993 and 2005. The Court found that in its first seventeen meetings, the Screening Committee, at no point, examined the inter se merits of the various applicant companies (paragraph 128). Even when, in its eighteenth meeting the Steering Committee did raise the question of framing guidelines for making that determination, no guidelines were actually framed (paragraph 132). And even when guidelines were framed, the Court found that they “did not lay down any criterion for evaluating the comparative merits of the applicants.” (paragraph 134) The Court noted that in its subsequent meetings, the Screening Committee made its allocations without a discussion about the inter se merits of the applicant companies (see, for example, paragraph 135, 137, 138, and 139 for specific instances), and even changed its own guidelines repeatedly (paragraph 136). In 2005, for the first time, the Screening Committee advertised for applications, but yet again, its allocations demonstrated no comparative assessment or evaluation of the applicants (see, for example, paragraphs 143, 146.1, and 148 for specific instances).

On the basis of these findings, in paragraph 150, the Supreme Court listed twenty-two procedural flaws with the allocation process, most of which had to do with the absence of any considerations about the inter-se merit between the applicant companies, the lack of any objective criteria for making that determination, and the constant changes in the norms and guidelines.  Thus, in paragraph 154, the Court held:

(From left to right), Chief Justice R.M. Lodha, Justice Madan B. Lokur, and Justice Kurian Joseph of the Supreme Court of India, the bench in the "Coalgate" decision.
(From left to right), Chief Justice R.M. Lodha, Justice Madan B. Lokur, and Justice Kurian Joseph of the Supreme Court of India, the bench in the “Coalgate” decision.

“To sum up, the entire allocation of coal block as per recommendations made by the Screening Committee from 14.07.1993 in 36 meetings and the allocation through the Government dispensation route suffers from the vice of arbitrariness and legal flaws. The Screening Committee has never been consistent, it has not been transparent, there is no proper application of mind, it has acted on no material in many cases, relevant factors have seldom been its guiding factors, there was no transparency and guidelines have seldom guided it. On many occasions, guidelines have been honoured more in their breach. There was no objective criteria, nay, no criteria for evaluation of comparative merits. The approach had been ad-hoc and casual. There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth. Common good and public interest have, thus, suffered heavily. Hence, the allocation of coal blocks based on the recommendations made in all the 36 meetings of the Screening Committee is illegal.”

It is crucial to note the Court’s assessment of the policy vis-à-vis the process. The Court upheld the non-use of a public auction as a method of distribution because, on a prima facie perusal of the material placed on record by the government, there were evident purposes behind the allocation that went beyond revenue maximisation. The Court did not substitute its own opinion of the legitimacy and validity of the purposes. On the other hand, while holding the process illegal, the Court did so on the basis that the government had placed no material to demonstrate how the allocations were made in a fair and non-arbitrary way. Therefore, much like its holding on the issue of auction, once again, the Court did not go into the question of whether the outcome of the government’s decision on allocation was valid or not, or into the merits of the guidelines; it restricted itself to the question of whether, in the process of allocation, the guidelines included essential considerations of merit and competence for deciding between applicant companies or not. It was the absence of relevant guidelines that constituted the basis of the Court’s decision, holding that the allocation was illegal.

Coalgate, therefore, represents an advance upon the route first marked out by the Court in the Second Spectrum Case. The Court will examine, for legality, the process of distributing natural resources. It will examine whether, during the process, the government has taken into account relevant considerations to ensure transparency and fairness. It will not, however – keeping in mind considerations of institutional competence and legitimacy – question the outcome of the process, or the policy behind the process.

The Court’s judgment is pragmatic and wise, and deserves to be lauded. One question remains open, however: what if the Screening Committee had prescribed guidelines for deciding inter-se merit between applicants, but the petitioners argued that the Committee’s allocation was contrary to its own guidelines? In other words, what degree of scrutiny will the Court apply to the government’s implementation of its own procedures, when disputed factual issues arise? Unlike an auction, where a violation of the results of the auction can be objectively determined, that enquiry is much harder to undertake when standards are at least partly subjective. Will the Court apply a hands-off test, taking the government’s determinations at face value, and insisting only upon the presence of guidelines (as it does, for instance, under Article 356) or a proportionality test, drawn from administrative law? Or, keeping in mind the principles of public trust and Article 39, will it subject them to a more rigorous scrutiny? Perhaps we need another Constitution bench to decide that question.

(Gautam Bhatia blogs at Indian Constitutional Law and Philosophy.)

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Supreme Court of India

Competence and legitimacy: The Supreme Court’s opinions on the distribution of natural resources

GautamBhatia_SupremeCourtofIndiajpgWhat obligations does the State have when it decides to outsource the exploitation of natural resources to private parties? To what extent – if at all – can courts enforce those obligations? These questions have come to the forefront over the last few years and are bound to dominate the political and legal landscape for some time to come. Two events, in particular, have contributed to this: the 2G Spectrum Scam, and the Coal block allocation scam, political controversies that rocked the previous government, and which were ultimately litigated before the Supreme Court. While the Court has reserved its judgment in the latter case, it issued between 2012 and 2014, an assortment of opinions in the former (“the Spectrum Cases”). These opinions go some way towards clarifying the present Court’s stance on these two questions and provide some guidance towards anticipating how future cases will be decided.

Simplifying greatly, the 2G Spectrum controversy arose out of the government’s decision to allocate spectrum to telecommunications companies on a first-come-first-serve basis. The entire process was rent with irregularities, such as an arbitrary advancement of the deadline for applications, and was duly challenged before the Court (the First Spectrum Case). The challenge itself, however, went far beyond simply impugning the specifics of the individual case: it invited the Court to rule on the standards generally applicable to government’s alienation, transference, or distribution of natural resources – a question of policy, if there ever was one. The Court accepted the invitation. It held that in distributing natural resources, “the State [is] bound to act in consonance with the principles of equality and public trust and ensure that no action is taken which may be detrimental to public interest.”

LawSchoolInductionIn the operative part of the Court’s opinion, these three principles – equality, public trust, and public interest (or common good) as obligations governing the State’s conduct – are repeatedly run together with little attention paid to the second important question: what is the Court’s institutional role in holding the State to these obligations? Equality, of course, is a constitutionally enforceable duty enforceable in the courts under Article 14. Additionally, the Court derived the doctrine of public trust (that is, in distributing natural resources, the State acts as a trustee for the people), and public interest or common good (whose difference from public trust is never satisfactorily explained) from Article 39(b), which is a non-enforceable Directive Principle of State Policy. Armed with this, the Court then held that “when it comes to alienation of scarce natural resources like spectrum etc., it is the burden of the State to ensure that a non-discriminatory method is adopted for distribution and alienation, which would necessarily result in protection of national/public interest… a duly publicized auction conducted fairly and impartially is perhaps the best method for discharging this burden and the methods like first-come-first-served when used for alienation of natural resources/public property are likely to be misused by unscrupulous people who are only interested in garnering maximum financial benefit and have no respect for the constitutional ethos and values. In other words, while transferring or alienating the natural resources, the State is duty bound to adopt the method of auction by giving wide publicity so that all eligible persons can participate in the process.”

Non-discrimination under Article 14 and the public interest

The bench in the First Spectrum Case - Justices G.S. Singhvi and A.K. Ganguly.
The bench in the First Spectrum Case – Justices G.S. Singhvi and A.K. Ganguly.

This paragraph is worthy of close scrutiny. Essentially, the Court transforms what is meant to be an Article 14 enquiry (requiring the State to adopt a non-discriminatory method) into a public interest enquiry, by holding that non-discriminatory methods of distribution necessarily protect the public interest. It then substitutes its own vision of the public interest for that of the State’s, and holds that the only method consonant with that public interest is an auction (indeed, the Court expressly overrode the Telecome Regulatory Authority’s (TRAI) opinion in favour of a first-come-first-serve allotment by holding that TRAI could not “make recommendations which would deny people from participating in the distribution of national wealth and benefit a handful of persons.”)

Courts lack the institutional legitimacy and the competence to hold the government to some standards

The Court’s opinion is unfortunate, because it conflates the two very distinct questions that were outlined at the beginning of the essay. In finding that the government is bound by standards of equality, public trust and the common good, it automatically takes upon itself the task of determining the content of those standards, as well as their enforcement. This, however, is anything but obvious: there are many things that the State ought to do, which must be enforced at the ballot box, via social movements or elsewhere – but not in the courts. This is because one of two reasons might exist to prevent courts from ruling on the matter: reasons of institutional competence, and reasons of institutional legitimacy. Structurally, courts are not equipped and do not have the resources – that is, they lack the competence – to decide certain issues (such as, for instance, the allocation of resources in the national budget). Separately, as unelected bodies, courts have limited authority to interpret laws and protect constitutionally guaranteed rights – they cannot, for instance, frame policy, because that is something that the peoples’ elected representatives are exclusively authorised to do. For all its Article 14 gloss, the Court’s opinion arguably transgresses both these principles, and its failure to engage with them is doubly troubling.

The bench in the Second Spectrum Case - Justices D.K. Jain, S.H. Kapadia, Ranjan Gogoi, Dipak Misra, and J.S. Khehar.
The bench in the Second Spectrum Case – Justices D.K. Jain, S.H. Kapadia, Ranjan Gogoi, Dipak Misra, and J.S. Khehar.

The Government’s reaction was a Presidential Reference attempting to re-litigate the issue under the guise of seeking a clarification on the scope of the judgment. A Constitution Bench of the Supreme Court retreated from the expansive position taken in the first of the Spectrum Cases. In the Second Spectrum Case, it focused on the use of the word “perhaps” in the previous opinion (“an auction is… perhaps the best method…), to hold that the First Spectrum Case was limited to its facts, and did not lay down any general principles. Unfortunately, the Second Spectrum Case, like its predecessor, failed to engage with issues of institutional competence and legitimacy. Once again, it took refuge in the boundlessly manipulable category of Article 14 “arbitrariness” to hold that “when… a policy [of distribution of natural resources] is not backed by a social or welfare purpose, and precious and scarce natural resources are alienated to private entrepreneurs for commercial pursuits… adoption of means other than those that are competitive and maximise revenue may be arbitrary and face the wrath of Article 14.”

There are two ways of reading the above paragraph. One is that the Court, while narrowing the actual reach of the First Spectrum Case, has kept alive its overall import: public interest and the common good will determine what is or is not arbitrary under Article 14, and that determination ultimately vests with the Courts, to be exercised on a case to case basis. There is, however, another interpretation, which comes through in a subsequent paragraph: if the objective of a particular distribution is not directly social welfare or common good, but indirectly aims at that goal through maximising State revenue, then non-competitive methods will attract Article 14. For example, in the case of spectrum, if the government’s objective in allocating it to private parties is to maximise revenue (which it then – presumably – uses to further the common good), then a non-auction-based method violates Article 14. Notice that this is very close to the traditional Article 14 two-pronged test of intelligible differentia and rational nexus: clearly, differentiating spectrum applicants into those who applied before and after the cut-off date (first-come-first-served) bears no rational nexus with the purpose of revenue maximisation. Indeed, the Court seemed to be heading towards this conclusion (although it didn’t specifically make it), when it held in a subsequent paragraph: “Where revenue maximization is the object of a policy, being considered qua that resource at that point of time to be the best way to subserve the common good, auction would be one of the preferable methods, though not the only method. Where revenue maximization is not the object of a policy of distribution, the question of auction would not arise. Revenue considerations may assume secondary position to developmental considerations.”

The future development of the Court’s jurisprudence depends on which reading of the Second Spectrum Case – narrow or broad – is adopted by future Courts. In this essay, I’ve tried to suggest that it is the narrow reading – one that limits itself to a rigorous intelligible-differentia-rational-nexus Article 14 analysis – is truer to the institutional role of the Court.

Going beyond Article 14

The bench in the Third Spectrum Case - Justices Vikramjit Sen and K.S. Radhakrishnan.
The bench in the Third Spectrum Case – Justices Vikramjit Sen and K.S. Radhakrishnan.

In addition to the core arguments outlined above, the concepts of public trust and public good have played an additional role as background principle guiding the interpretation of legal provisions. In the Third Spectrum Case, a controversy arose over whether the Comptroller and Auditor General (“CAG”) was authorised to demand an audit of private telecom companies under its Article 149 powers. The key question was whether, in Article 149, the term “… any other authority or body”, that came after “Union” and “States” included purely private entities (which were therefore subject to a CAG audit). On a textual reading, it would seem that – on the principle of noscitur a sociis – the term was limited to bodies of a public or quasi-public character. The Court held, however, that “when the executive deals with the natural resources, like spectrum, which belongs to the people of this country, Parliament should know how the nation’s wealth has been dealt with by the executive and even by the UAS Licence holders. When nation’s wealth, like spectrum, is being dealt with by even the private parties, like service providers, they are accountable to the people and to the Parliament.” On a similar note, in Reliance Natural Resources Ltd. v. Reliance Industries Ltd., which involved an extremely complex dispute over the fixing of gas prices, the Court invoked the international law principle that a nations’ people have ultimate sovereignty over natural resources and the public trust doctrine, along with Articles 39(b) and (c) of the Constitution, to interpret Article 297 of the Constitution as prohibiting the State from entering “into a contract that permits extraction of resources in a manner that would abrogate its permanent sovereignty over such resources”, and that the State could not, inter alia, “transfer title of those resources after their extraction unless the [State] receives just and proper compensation.” These two cases demonstrate that Article 14 is not the only recourse available to the Court: it can use the public trust doctrine, and other similar concepts, as background principles to interpret constitutional and other provisions to conform to their requirements. How far it will go down that path before interpretation becomes invention, again, remains to be seen.

(Gautam Bhatia blogs at Indian Constitutional Law and Philosophy.)

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Quit playing games – TDSAT approves 3G ICR agreements, underlines role of independent expert adjudicator

StephanieSonawaneOn April 29, the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”) held the Union Government to its promise and permitted 3G intra-circle roaming arrangements (“3G ICR arrangements”). Stating that the government cannot be seen playing games with matters of national importance such as allocation of spectrum, the TDSAT said that these arrangements were legal, valid, and in the national interest. In doing so, the TDSAT has emphasised the role of an independent expert adjudicatory body.

Brief background

ACC-BlogAdTill 2003, there were separate licences for basic (that, is landline) and mobile services. In November that year, the Department of Telecom (“DoT”) announced a unified licence policy under which a single licence, called the Unified Access Service Licence (“UASL”), would be issued for providing all types of services. Under Clause 2 of the UASL, the operators can provide all types of telecom services, including 2G, 3G, and data.

After that, in 2008, the DoT issued an amendment to the UASL, by which the licencees or operators were permitted to enter into “mutual commercial agreements for intra-service area roaming facilities.”

The issue of 3G ICR

3G_UASL_ICRArrangementsIn 2010, the DoT issued a Notice Inviting Application (“NIA”) for operators eligible to participate in a bid for 3G spectrum under the terms and conditions mentioned in the NIA. Only a limited quantum of 3G spectrum was offered. As a result, even before the auction, all telecom operators knew that there were limited blocks of spectrum available at the time of auction in each service area. The corollary of this was that if the operators failed to acquire 3G spectrum, their subscribers would be adversely affected as they would not be able to provide 3G services.

For clarity, the telecom operators raised several queries of the DoT asking whether those who did not hold 3G spectrum would be permitted to roam on the 3G networks of other operators who would succeed in the auction. The DoT responded categorically:

– That licensees who did not hold 3G spectrum were permitted to enter into roaming arrangements on the 3G networks of other licencees;

– That roaming arrangements were bilateral decisions; and

– That roaming policy was not specific to spectrum bands.

Prior to the auction, the operators knew therefore, that there would be a winner in certain circles and in the same circle, a party who was not successful could execute bilateral roaming arrangements.

The operators acted on the DoT’s representations and executed bilateral arrangements, known as 3G ICR arrangements, which permitted operators with 2G spectrum and without 3G spectrum in a particular service area to enter into agreements with operators who held 3G spectrum in that service area. The operators could thus offer seamless services irrespective of the subscriber’s location.

Soon however, the DoT abandoned the position it had taken in its categorical responses and issued a cumulative demand of over Rs. 1200 crores on several telecom operators on the grounds that the 3G ICR arrangements violated the terms of the telecom licenses, that is, the UASL granted to the operators.

The TDSAT’s decision

Challenging the DOT’s demands, the operators approached the TDSAT, the expert adjudicatory body, which gave its seal of legitimacy for such bilateral agreements for the following reasons:

– Neither of the parties can be said to have contravened the provisions of the UASL by entering into intra-circle 3G arrangements;

– The UASL has a very wide scope and permits the delivery of a vast range of services;

– In 2008, the DoT expressly allowed a licensee to enter into “mutual commercial agreements” for intra-service area roaming facilities with other licensees;

– The DoT was supposed to give its answers and representations with full responsibility. It held, “The Government cannot be seen playing games in matters of national importance such as allocation of spectrum, this not only affects operators but is crucial to the promotion and growth of communication in the country”;

– Allowing ICR arrangements will result in increase of the gross revenue of the operators and the government, having a percentage share in the revenue of the licencees, would be able to garner larger sums as licence fee, which benefits the consumers, the operators, and the State;

– The idea that a 3G licence is different from a 2G licence is flawed and stems from a misconception of the provisions of the UASL and is contrary to established and well-accepted technological facts;

– The agreements are in furtherance of one’s trade or business and is part of the fundamental right guaranteed under Article 19(1)(g) of the Constitution. Any prohibition or curtailment of that right has to be on a far more definite and tangible basis than a mere fanciful interpretation of the terms of the licence.

The judgment has sent a strong message to operators, investors, and the government. The unpredictability of the DoT’s position saw the immediate exit of foreign investors from the telecom sector. In spite of the recent enhancement of the FDI limit in the sector to 100 per cent to attract long term investment, telecom received the lowest FDI for any sector between April and October 2013. The infamous 2G scandal did not help matters.

The TDSAT’s judgment however, has assured investors that their rights are safeguarded in the current regulatory regime by an impartial adjudicator. It demonstrates the need for and independent expert adjudicatory body with statutory powers for the adjudication of disputes under the license, as a safeguard against the arbitrary decisions of the government, particularly since the government plays multiple roles — those of policy maker, licensor, and competitor through BSNL and MTNL. It has also meant that subscribers are free to choose any operator as, irrespective of area, seamless and continuous 3G can be provided at affordable rates.

(Stephanie Sonawane works on telecom issues at the Supreme Court of India with Senior Advocate Gopal Jain.)